Super system needs to be fairer and cheaper

TAX breaks to boost superannuation come at a hefty cost to the taxpayer. Treasury estimates they will cost $32 billion and $45 billion a year by 2015-16. That's a lot of cash that could go to education, nation building, tax relief and budget efficiency.

At present super tax breaks are skewed towards those who need them least, meaning most Australians are not getting value for their money and it is not fair.

Super tax concessions should reflect the progressive system that increases the proportion of tax paid as income rises. Yes, the rules are complex and change often but this is no excuse for bad policies, especially when the super industry enjoys a fee-generating government mandate to manage what will soon be 12 per cent of national wages and salaries.

In a perfect world the government would strip bare the system and revisit the 2009 Henry tax review to simplify the rules and improve the sustainability of compulsory super. Barring that, a rise in tax on super fund earnings for those with the largest balances would help to restore equity and affordability. Others measures are also required.

Advertisement

Super fund members pay no tax on withdrawing savings at the age of 60 and the government has ruled out change. To save money, it has already halved to $25,000 the amount taxpayers can voluntarily contribute to their super and still get a tax break. It has also doubled to 30 per cent the tax on contributions for $300,000-plus earners. All super earnings are taxed at 15 per cent though the government is considering raising this to 30 per cent for the top 1 per cent of earners.

The Henry review recommended no withdrawals tax, no contributions tax and halving the tax on earnings to 7.5 per cent. Instead, super would be taxed the same as wages and salaries, except that taxpayers could claim a flat rate tax offset of up to 20 per cent. As such, lower earners gain a relatively stronger tax incentive than those with higher incomes who have the means to save anyway. Sadly, the government has left Henry languishing.

However, governments face a significant reduction in years to come as the economy restructures and the nation has fewer, older taxpaying workers. The nation cannot afford to throw money at those who need it least. Compulsory super was created not to replace the aged pension but to reduce reliance on it. It is meant to help those who otherwise would struggle to save, not those who have the means to do so anyway.

Treasury analysis before the doubling of the contributions tax for the top earners shows combined government support for retirement incomes through the aged pension plus super tax breaks was virtually even for all income groups except for the top 10 per cent. The top 1 per cent enjoyed more than twice the government support as the bottom 90 per cent, thanks to the skewed tax breaks. The higher contributions tax would have reduced this, but only slightly.

The tax break on super tax earnings cost the government $13.1 billion to $17.1 billion in 2012-13, a burden on all taxpayers. Raising the earnings tax for top earners will save the government a significant amount. Yes, it will be largely short term because future earnings for taxing will be limited by the cap on voluntary contributions. The amount it saves will also be reduced as top earners direct some savings to more tax-friendly investments such as negatively geared property.

Remember though that the intention of compulsory super is to boost retirement savings for those who would otherwise not do so. Few would dispute that the top 1 per cent of earners could afford a less attractive super tax break. Even the top 5 per cent of earners on incomes as low as $143,900 could reasonably expect to accept a smaller proportion of the tax breaks. But any further creep to lower earners could prove problematic as it would begin to deter the vast middle class from the system.

The government also has other weapons. Super investors retiring at the age of 60 from 2024 onwards will be able to withdraw their funds tax free but will not be eligible for the aged pension until they're 67. Either retirees have to use much of their super early and then rely on the aged pension or, for higher earners, they spend up quickly then can draw a part pension later.

The Henry review proposed increasing in stages the so-called super preservation age from 60 to 67. This would save taxpayer money by increasing the pool of taxable super savings (with less reliance on aged pensions) while also increasing the number of working taxpayers. Similarly, strong government should tighten aged pension rules.

The super system needs thorough reform but short of that the government should pursue measures that make it fairer and cheaper for the vast majority.

Duck! Or at least be afraid - be very afraid

YOU will not be reading anything in this space in one week's time if NASA has its calculations wrong. Next Friday about 9.24am Sydney time an asteroid 45 metres in diameter will zoom over the Indian Ocean between Sumatra and Christmas Island in what NASA says will be the closest fly-by ever for an object of its size. The very dully named 2012 DA 14 will be 8000 kilometres closer than most weather and communications satellites but NASA insists it will come no closer than 27,700 kilometres to Earth.

The last asteroid hit Earth in 1908 and it happens every 1200 years or so. The gambler's fallacy would suggest we're safe, except that any mathematician will tell you probability has no memory. Still, NASA has monitored this one's orbit closely and says it is highly predictable.

So the real race is on to describe the terribly scary size of this bit of rock whizzing past. Some reports say it's half the size of a football field. Others say it's as big as a jet plane or the size of an office building, while the real optimists say it's less than 1 per cent as big as the asteroid that supposedly wiped out the dinosaurs.

This one's surface area is 6361 square metres, about as big as the expanded lounge facilities at Canberra airport.

So all that is left to do is to describe what would happen if 2012 DA 14 defied the odds and smashed into Earth.

NASA says the impact would be roughly equivalent to a 2.4 megaton bomb, ''enough to flatten a large area but not globally catastrophic''. Worried reporters in the Philippines say it would destroy the province of Pampanga. That's 2181 square kilometres. For Australians, that's 2½ times the size of Canberra. Fingers crossed.